If you owe back taxes, the IRS has several IRS tax relief programs designed to help struggling taxpayers. These include installment agreements, offers in compromise, and penalty relief. You can apply for these programs by yourself or hire the help of a tax relief professional. Discover the pros and cons of each program and how to apply.
The sight of an Internal Revenue Service mailing is enough to send most taxpayers into a cold sweat. And when that notice of federal tax is about back taxes owed, it’s easy to want to ignore it.
Don’t. Pay off as much of your tax debt as you can to prevent the IRS from coming after you hard. IRS collection methods are much more powerful than the average creditor — it can place a tax lien that puts a legal claim on your property or levy your assets.
In 2020, the IRS counted 13.2 million delinquent taxpayer accounts and collected nearly $1.9 billion in back taxes.
The United States IRS may seem like a bully, but the agency tries to assist taxpayers through the process. Here’s a guide to relief options for individuals with back taxes.
What relief programs does the IRS offer?
The IRS has a variety of plans to assist taxpayers in satisfying their back tax. To qualify for any IRS taxpayer relief initiative, you must file all prior-year tax returns. If you have unfiled returns or significant tax debts, it might be wise to contact a tax professional. Tax professionals will have the information to navigate collection action, payment options and help determine your tax liabilities. The IRS provides information on their website, but it is often overwhelming for the average person.
Key tax relief programs
- Fresh Start Initiative — The IRS began Fresh Start in 2011 to help struggling taxpayers.
- Installment Agreements — A payment plan is an agreement with the IRS to pay the taxes you owe within an extended timeframe.
- Offer in Compromise — An offer in compromise allows you to settle your tax debt for less than the full amount you owe.
- Penalty Relief — Some types of penalties are eligible for penalty relief, including the penalties for failure to file or pay on time,
- First Time Abatement — The first-time penalty abatement (FTA) waiver is an administrative waiver the IRS can grant to taxpayers who fail to file or fail to pay their penalties.
In 2011, the IRS Fresh Start Initiative launched to alleviate pressure on delinquent taxpayers. It bumped up the amount taxpayers can owe to $10,000 (in most cases) before the IRS issues a federal tax lien. It also adjusted allowable living expenses, student loans, and local tax debt payments into approved budgets and more.
If you failed to file for a tax year, make a deposit or pay on time due to circumstances beyond your control, you may be able to work with the IRS on handling the penalty payments. Submit a Claim for Refund and Request for Abatement (Form 843).
You may be asked for additional information. If you’re appealing a penalty, the charge continues to accrue throughout the application process. Check out the IRS’ online penalty appeal tool.
Reasonable cause: Try this option if you “used all ordinary business care and prudence” to meet your tax debt but couldn’t due to factors such as serious illness, inability to obtain records, fire, natural disaster, and more.
First Time Penalty Abatement policy: This applies if you’ve never had to file a return before or had no penalties for the three years prior and have taken steps to file the required returns and pay the balance due.
Although this is not total tax debt forgiveness, penalty abatement can save you hundreds if not thousands of dollars.
What is First Time Abatement (FTA)?
FTA is an administrative waiver of FTF, FTP, and FTD tax penalties. FTA is granted when a taxpayer is subject to one or more penalties for the first time on a single tax return. To qualify, you must also meet additional criteria, like being up to date on your tax filings and having paid or arranged to pay any tax debt owed.
If you received incorrect verbal advice from the IRS, you might qualify for administrative relief. Ask for a statutory exception if you were given inaccurate advice in writing. Tax legislation may also give you an out from a penalty — check for exceptions in the Internal Revenue Code.
Offer in Compromise (OIC)
Taxpayers can use the offer in compromise program to settle with the IRS for less than the total tax owed. The Fresh Start program expanded the OIC program, making it available to a larger group of people. Last year, taxpayers proposed 67,000 offers in compromise; the IRS accepted 27,000 of them, amounting to $204.7 million.
With an Offer In Compromise, you suggest an amount you can pay to the IRS instead of your actual balance on the Offer In Compromise application. Then, you’ll submit a lump sum of 20% of that total offer in cash, followed by the rest in a payment plan of five installments or less once you’ve been approved. Alternately, you’ll send in a smaller amount with your application, continue to make installment payments while the IRS reviews your offer, and then pay off the remainder monthly once approved.
The IRS will evaluate your ability to pay your balance based on income, expenses, and asset equity. If you’re in an open bankruptcy proceeding, you’re ineligible. Check whether you qualify with the IRS online tool here. The Offer In Compromise process can take months, if not years. In cases when the IRS doesn’t decide on your application within two years of receiving it, consider your offer accepted. If the IRS rejects your offer, you can request an appeal via Form 13711.
Individual taxpayers who owe up to $50,000 can set up a monthly payment plan for up to 72 months, though some qualify for a short-term payment plan if the balance owed is less than $100,000. In some situations, the IRS can’t deny an installment agreement request if you owe less than $10,000, according to the Federal Trade Commission. Businesses must owe $25,000 or less in payroll liabilities.
Taxpayers who meet the requirements for an installment agreement can apply online. Your outstanding balance will continuously build up interest until paid off. Those who don’t qualify to participate in the online installment agreement program can try their luck by submitting an Installment Agreement Request (Form 9465) and a Collection Information Statement.
Keep in mind this is an installment agreement request and subject to approval from the IRS.
Does the IRS provide a debt forgiveness program for medical reasons?
Here’s what you should know about tax debt relief for medical reasons and how to get expert help if you need it.
The IRS wants to collect the balance that you owe them. However, if you did your best to meet federal obligations and only failed to do so because of circumstances beyond your control, you can apply for penalty relief.
The IRS offers tax debt relief for medical reasons. In 2016, taxpayers who failed to pay their taxes incurred $4.9 billion in penalties — but about $1.1 billion of them were abated. That means that the IRS forgave about 22% of all penalties.
You might qualify for penalty relief if any of the following circumstances apply to you or your immediate family (i.e., parents, spouse, siblings, children, and grandparents):
- Serious illness.
- Unavoidable absence.
Refer to Section 188.8.131.52.2.2.1 (11-25-2011) of the IRS tax code to read the laws about penalty relief due to these causes. Consider hiring a tax relief company if you have considerable tax debt (more than $5,000).
Hoping to get your tax penalties withdrawn in the wake of a medical emergency? Here’s what you should know about tax debt relief for medical reasons and how to get expert help if you need it.
How do you qualify for penalty relief?
To determine whether you qualify for penalty relief, the IRS will analyze your situation. To do so, it will collect information including, but not limited to:
- What happened?
- When did it happen?
- In the case of illness, what was the severity?
- Who was affected, and what is your relationship to the person?
- How did the situation prevent you from filing or paying your taxes, and did it prevent other day-to-day activities?
- If the situation changed, have you taken steps to file or pay your tax liability?
In the case of illness or incapacitation, you must also provide supporting documentation with start- and end-dates from a physician, hospital, or court.
How can you file for penalty relief?
You can file for penalty relief by calling the IRS or by mailing in a signed letter. If you send a letter, it must answer the above questions and mail it to the address on your IRS notice. We recommend the latter as it allows you to document your complete case. If you call, the IRS agent will be in charge of the documentation.
What penalties are eligible for relief?
Eligible penalties include those for failing to:
- File a return (FTF).
- Pay taxes on time (FTP).
- Deposit taxes as required (FTD).
Other penalty relief options are determined on a case-by-case basis.
What if your penalty relief request is denied?
If you made your case to the IRS and receive a Notice of Disallowance, which states they denied your request, you can file an appeal within the given timeframe. The IRS has an online Penalty Appeal Self-Help Tool which can help. However, you may get better results with an expert with experience in tax debt issues.
What are other situations eligible for tax debt relief?
Death, serious illness, and unavoidable absence aren’t the only events that qualify a taxpayer for relief programs. The IRS may also grant relief in the following circumstances:
- Natural disaster.
- Other disturbances.
- Inability to obtain the necessary records.
- A mistake.
- Erroneous reliance or advice.
- Ignorance of the law.
In these circumstances, the IRS grants relief on a case-by-case basis; there are no guarantees.
You can view reputable and recommended tax relief firms below:
Tax relief fees
Some of the IRS programs come at a cost. For example, offers in compromise have a non-refundable $205 application fee for anyone above a certain income threshold.
Tax attorneys generally don’t come cheap. Many require a flat fee to prepare and submit specific paperwork. Premiums, retainers, and hourly fees vary based on a variety of factors.
Some tax relief companies ask for money upfront without a clear explanation of how services are billed. Before you pay a tax debt relief company, know their refund policies and make sure they have qualified attorneys on staff.
The Federal Trade Commission receives complaints that some companies make unauthorized charges to clients’ credit cards or withdrawals from their bank accounts. Please report problems to the IRS Office of Professional Responsibility or file a complaint with the FTC online, which will log it with the secure Consumer Sentinel Network.
Should you hire a tax relief firm?
Tax relief companies can help you to reduce the amount of debt that you owe. Further, they help to stop collection activities such as garnishing wages or seizing assets. Typically, the process starts with a free consultation then the firm provides its recommendations and fees.
Having tax professionals on your side is beneficial; they know the laws and the programs. If you decide to hire a firm, you will authorize them to act on your behalf with the IRS. In the case of taxes owed and tax penalties, they can do your bidding to reduce the amount you have to pay.
Should you hire a tax relief firm? Consider the pros and cons.
- Reduce your tax debt burden.
- Save you money on penalties and interest.
- Prevent collection actions.
- Have a tax expert on your side.
- Reduce the pressure on you.
- Results aren’t guaranteed.
- You will have to pay for the services.
If you owe a lot of money to the IRS, it can help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates.
Dealing with the IRS is not an easy process. You can apply for any of the IRS relief programs by yourself, but a tax professional can help. However, it is important to tread carefully.
As in every industry, some scammers provide little to no value for their expensive fees. The FTC warns, these companies “don’t settle the tax debt, and in many cases don’t even send the necessary paperwork to the IRS.” Adding insult to injury, some companies don’t provide refunds and leave people even further in debt.
Here is our list of the best tax relief companies currently available.
Tiffany Hsu no longer writes for SuperMoney. In addition to her work at SuperMoney, Tiffany covered breaking news for New York Times and economic news for The Los Angeles Times. She is a UC Berkeley graduate and earned an M.B.A. from Columbia University.